Jokowi’s Make-or-Break Moment Maps Path for Asia’s Next Star

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Steve Hanke remembers when Indonesia was the poster child for emerging markets' bright future.

As chief adviser to President Suharto during the Asian financial crisis he got a close-up view of the economy's potential before it all came crashing down two decades ago. Now a professor of applied economics at Johns Hopkins University, Hanke also saw how governments that pursued the right mix of policies -- involving open trade, lower taxes and fewer regulations -- could leapfrog those that didn't.

As the coronavirus pandemic challenges Indonesia like never before, President Joko Widodo's commitment to economic reform is being tested. How quickly Indonesia recovers, and how authorities respond to the crisis, will determine if the nation can live up to its promise of becoming one of the world's biggest economies in coming decades.

“The Covid-19 crisis deals a really big blow to Indonesia's economic ambitions,” said Ben Bland, director of the Southeast Asia program at the Lowy Institute in Sydney.

Jokowi, as the president is known, was re-elected a year ago on an expansive reform agenda. Airlangga Hartarto, his coordinating minister for economic affairs, said Sunday the government “remains committed to structural reform,” even as it prepares for a “new normal” after the pandemic.

Read: Jokowi Vows Sweeping Indonesia Reforms: ‘I Have Nothing to Lose'

Bland called the pandemic “a major setback” for many of Jokowi's key goals, from boosting the growth rate to increasing quality jobs, reducing poverty and building infrastructure. Indonesia's economy recorded its worst showing in almost 20 years in the first quarter of the year -- and that's even before the pandemic's full impact shows up in the data.

“The government can't realistically pursue structural reforms until it has tackled” the health and economic crises, Bland said. “There will only be clarity on the full extent of the economic damage once the health crisis has been contained, but Indonesia is not yet at that stage.”

Emergency Steps

Authorities were seen as slow to respond to the pandemic as Jokowi rejected calls for a full lockdown, citing the likely impact on the poor. Some officials told the nation of 270 million people they were blessed with immunity or could rely on prayer.

As of Tuesday, Indonesia had more than 12,000 confirmed virus cases -- anecdotal evidence suggests the real tally is higher -- and 872 deaths, the most fatalities in Asia after China and India. The government has banned travel and progressively tightened restrictions on movement.

Jokowi has rolled out emergency measures to support the economy, including:

suspending a budget-deficit cap so it can spend more in response to the pandemic
cutting the corporate tax rate to 22% from 25%, with a further reduction to 20% planned in 2022
offering tax breaks to companies, and some individuals, in a range of sectors
providing minimal cash payments for millions of Indonesians who lost jobs
allowing small businesses and contractors to defer some loan repayments

The government has allocated 405 trillion rupiah ($27 billion) for virus response, funded in part by a new central bank program to buy sovereign bonds. Bank Indonesia also has lowered its benchmark interest rate twice this year and tweaked rules to boost liquidity in the banking system.

Critics say the stimulus is not nearly enough, and time is running out for authorities to get ahead of the economic blow.

Hanke called the incremental lowering of the corporate tax rate “peanuts.” There isn't enough meaningful reform in Indonesia at the moment, he added, and without that “it's not going to get up there on a real high trajectory on any kind of sustained basis.”

Labor Laws

More fundamental changes to the economy are now in jeopardy. Deliberations on labor-law reform, part of an omnibus bill submitted in February, are on hold after unions threatened protests.

Read: Jokowi Vows Country-Wide Protests Will Not Derail Reform Agenda

Overhauling labor laws is a “critically important structural reform” to attract foreign direct investment, said Amy Searight, director of the Southeast Asia Program at the Center for Strategic and International Studies in Washington.

The fact that Indonesia was one of the few Southeast Asian countries not to benefit from the U.S.-China trade war “goes to show that it's a struggle for Indonesia to really do the necessary moves to get into the game of getting investment that would really be a boost for its manufacturing production,” she said.

Read: Why Indonesia Misses Out as Companies Move From China: QuickTake

Jokowi's Agenda

First elected in 2014, Jokowi promised Indonesia's economy would reach 7% annual growth under his stewardship. The International Monetary Fund indeed expects Indonesia's economy to grow 8.2% next year -- but that's only in comparison to the 0.5% growth they predict in 2020.

The government has slashed this year's growth forecast to 2.3% and warned the economy could even contract in a worst-case scenario. Jokowi says better times are ahead, but his goal to make Indonesia into a $7 trillion economy by 2045 -- from about $1.1 trillion now -- appears to be a tall order.

“If Indonesia continues to just muddle through with policies that bring it just barely good enough economic growth,” Searight said, “then it's going to be the continual disappointment.”